Though reforms come with short term pains that are deep, pervasive and uncomfortable, they are necessary antidotes for a struggling economy to experience positive turnaround, growth and long-term benefits. These, among other things, are the views of ODUNAYO OJO, CEO, UPDC Plc, in this interview with CHUKA UROKO, Property Editor. Ojo also speaks on the spate of demolitions in Lagos and offers solutions; he reveals his company’s new business strategies and torchlights the UPDC REIT—its viability and projections into the future. Excerpts:
It is one year of a new government in Nigeria and what the citizens see is hardship all over. What is happening that shouldn’t have happened? Where is the leadership getting it wrong?
It is true that the economy is struggling. We have seen a combination of many economic headwinds in the country today. There is high inflation which is over 30 percent. There is also a very volatile exchange rate regime which is affecting businesses. There is a high cost of doing business; high energy cost and there has been a lot of business dislocation as a result of a combination of these economic factors. This last one year has been very challenging. Both individuals and businesses are feeling the pain of all these.
Our view is that these are the pains that come with structural reforms. The trajectory that Nigeria was going was as a result of many factors, including Covid 19 and successive economic recession in the last 8-9 years. Also, there is a combination of international and geopolitical conflicts like the Russia-Ukraine war; Israel-Hamas war; and many other external conflicts that affect the global economy. These impact not only Nigeria, but also many other parts of the world.
I strongly believe that structural reforms are necessary so that we will be able to recalibrate the economy for growth. That is what we are experiencing today and it is a process. It takes a structural reform for Nigeria to witness a turnaround and begin to see the gains of economic development.
The reform processes are painful and they have very challenging consequences in the short run. But I strongly believe that in the medium to long term, it will benefit the economy. The removal of petrol subsidy, floating of the naira and investments going into infrastructure are good for the economy long term.
Let us look at the other side of this reform by asking what could be done in the interim to cushion its pains on the people. Also, are there reforms in reality or they are mere pronouncements?
From what we have read and some of the engagements that we are having, there is evidence that reforms are really on-going. It has been very challenging and there is no doubt about that. The pains that we have now show reforms are on-going. It is no longer business as usual in some quarters. There are impacts on costs and the way we used to do business. The painful impact everywhere is as a result of certain actions being taken by the government. If we are consistently toeing the path of structural reforms with efficiency, within the medium to long term, we will see results.
Between the federal government’s monetary and fiscal policies, some people say there is a mismatch. They explain that while the monetary policy is tightening, the fiscal policy seems to be looking the other way. What is your take on this?
The challenges facing the Nigerian government are multi-dimensional and they are not easy ones to fix. First and foremost, there is high inflation. I believe this is one of the problems the monetary policy is trying to address. The increase in MPR has led to the increase in interest rate to make sure that the liquidity in the system is mopped and also to make sure that the challenge of inflation is stemmed. To that extent, we can understand the rationale for those policies.
The fiscal policy on the other hand requires that we must continue to spend; that we cannot stop spending because we are a developing economy. There is a need for investment and also for certain capital expenses to continue to be funded because we have a lot of deficits especially in infrastructure.
Most economists agree that one of the fastest ways to grow an economy is through investment in infrastructure. Massive investment in infrastructure is therefore required. I would encourage everyone to see the bigger picture in terms of the bigger impact the policies will make at the end of the day.
Read also: Lagos leads: 5 African cities with the least affordable real estate in 2024
The Coastal Highway has been a subject of controversy bordering on its timing, cost, and environmental and social impact assessment. What’s going wrong here?
The coastal road has been in the country’s infrastructure masterplan for years. No doubt there are certain consequences—some intended, some unintended. But the bigger picture is that this is a massive infrastructure development that will have a larger impact on the economy. It will create jobs and improve transportation connectivity and when these things happen, naturally, there are consequences and benefits to the economy.
I believe that investing in infrastructure or capital projects will ultimately lead to economic growth and development. I strongly believe it is the right way to go. I also believe that efficiency in stakeholder management is as important as the investment so that everyone is carried along and be knowledgeable about what is going on in the economy.
Still on the monetary policy, the CBN has been bullish trying to tame inflation. This partly explains why the MPR has been rising month-on-month. How does this affect you as a property developer?
Yes, it is affecting us a lot because it has increased the cost of finance which in turn increases the cost of our project and ultimately increases the cost to our customers. But the way I see it is that sometimes we need to endure short term pains to be able to get long term gains. For that reason, I strongly believe that, in the medium to long term, inflation will be stemmed and naturally, the rate will be adjusted.
We had seen this before in this country. This is part of economic cycle and even in other parts of the world, when inflation is high, the interest rate will increase. It is a basic economic tool for managing inflation. Economists predicted it and so it was expected to happen.
As per how it affects real estate, high interest rate means that the rate of development will slow down in the short term but will pick up again when some of the indices improve.
At UPDC, in the meantime, we are re-engineering our operations and ensuring that we are more efficient, ensuring that we remove all wastages; improve the quality of our products in order to pass the gains of this efficiency to our customers. Every business has to innovate and apply such tools as technology and very well improved processes to make sure that projects are delivered on time, on budget and at specified quality.
We are here for the long term; we have been able to weather the storm through a series of economic ups and downs and we are still here. So, we are not at all disturbed about the short-term pains of the moment. We had seen this cycle before. We encourage increased collaboration between the government and the private sector. We believe that each party has something to bring to the table to get out of this situation as soon as possible.
The Lagos State government in recent times has been demolishing buildings and this is affecting lives and livelihoods. If you were the governor of the state, what would you do differently?
The subject of governance is not an easy one. I am always sympathetic with people in authority because it is not an easy task. If you look at what is happening in Lagos, the urban sprawl and decay are increasing at a very alarming rate and if it is not stemmed, we may not have a Lagos that we will be proud of in the future. That is the truth.
But, for some reasons, development control has been slower than the rate of construction and I believe that is what is being corrected with some of these demolitions. We are all aware of the degeneration of several neighbourhoods into slums even in some highbrow areas.
We are aware of people who don’t build to any known development guidelines. We must not also forget the menace of building collapse for which lives and property have been lost.
I think what the government is doing is an attempt to regulate and sanitise the development process in Lagos and as a result, some developments may be affected.
What would you suggest as solutions from both builders and government in order to avert these unfortunate incidents in future?
In the long term, I think instituting the right type of development control is a necessity in a megacity like Lagos on the part of all the stakeholders, not just the government. As developers, we have a role to play. I have always maintained that one of the strong points for UPDC is that we do not cut corners when it comes to development control. We believe that if you follow the masterplans and get all your approvals, you will not have any problem with the government.
But when the processes are not followed and things are not done properly as they should, the risk of demolition will always be there. So, I believe it is a regulatory matter and some of those structures should not have been built in the first place. But now that they have, or are being built, the anomalies need to be corrected.
I also believe that, on the part of the government, there is a need for sensitization and education in the industry to avoid some of the unfortunate situations we have seen in the recent past. Some people have lost their homes and invested capital just because, sometimes, what ought to have been done, was not done. If people are sensitized and they are all aware, and follow the rules, that will help to avoid some of these incidents in the future.
Some people view government’s action as a lesson but taught in a hard way. Otherwise, where are the state’s regulatory agencies? Shouldn’t they have stopped work on these buildings at construction stage? Could it be that all these are driven by corruption?
My view is that, in almost all the cases I have seen or read about, there have been warnings that are oftentimes ignored. If you drive along the streets of Lagos, you will see a lot of buildings that have been marked, which, to me, is a red flag.
These warnings are largely ignored and, you know, ignorance of the law is not an excuse. I commend people in the building development agency because they go round and they mark those buildings they find defective and not following approval guidelines.
Some of those warnings are calls for rectification while construction is going on. It could be for the removal of those buildings when construction is still going on. These warnings are ignored and this is where the problem emanates from. When a development infraction is detected, it needs to be addressed, no matter what.
Administrative capacity is also limited and we all have to admit that. This is why when a decision is made, the social impact is usually huge. I believe that he who comes to equity must come with clean hands. If a developer has been notified that there is an infraction on the building at an early stage of construction, let him address it.
The property market is tilting towards the mid-low-income buyers. With the re-engineering process you are carrying out, when are you going into low-income or mass housing?
This is a process and I believe UPDC can play a role in the mass housing space as well. We have never shied away from contributing our quota in reducing the housing shortage in Nigeria. Every house that is built contributes to the housing supply deficit in the country.
Affordable housing is a very difficult subject to address, mainly because of the structural issues that affect its delivery. We don’t have a sustainable mechanism for retail finance for instance. All over the world, affordable housing is not cheap to build or acquire, unless people are able to pay over a period of time at a low interest rate. This is what makes housing affordable.
When we talk about low-cost housing, we can think of housing that could be delivered through technology and building processes that could reduce marginal cost of building and all that.
But affordability has to do with the length of time you have to pay for the building and the cost of the financing model. So, this is one of the challenges our industry has been trying to fix. Discussions around this are on-going and there have been interventions from the Federal Mortgage Bank of Nigeria (FMBN) and the National Housing Fund (NHF) towards this but these are not yet where we need them to be.
Another challenge against affordable housing is infrastructure. There is no affordable infrastructure anywhere in the world. As a private sector player, we use our money to provide infrastructure. While we do our part to make sure that this segment of the market is served, we also have to be mindful that the cost of doing business in our industry is very high. These include cost of land acquisition, title transfer, title perfection and even the administrative cost of acquiring land is not affordable.
Another issue is construction materials. About 70 percent of the construction materials are imported. All these are not affordable. We are working with various segments of the value chain to make sure that we bring down the cost of these various issues so that, ultimately, the house delivered is affordable. I strongly believe that with the various conversations and interventions that are on-going, we will surely get there.
There are strategies that are being employed today to see how housing can be more and more affordable for more people. For instance, the approval by Pension Commission for contributors to use 25 percent of their pension savings as equity contribution to acquire property. This is a right step in the right direction because you can use it to reduce the cost of housing. This is also expected to catalyse homes delivery process in the next couple of years.
UPDC pioneered the Real Estate Investment Trust (REIT) in Nigeria, but not much is heard about that except occasional reports from the stock market. What impact are you making in that space?
Obviously, we can do more in terms of sensitizing the public about REITs. One of the uniqueness of REITs is that it is a specialized investment instrument that many people are not participating in.
The UPDC REIT is close-ended and what that means is that it is fully invested. Investors are encouraged to make enquiries on the REITs through their stockbrokers or the Fund Managers. We would also do our best to educate the investing public on the benefits of investing in REITs which include its high cash payouts and distributions amongst other gains.
How profitable is that REIT now given that it depends more on rental income from your properties. Today, the rental market is also struggling due to economic challenges?
The REIT is an investment that is suited to a certain kind of investor. It constantly pays dividends unlike companies which may suffer some fluctuations in their profit earnings. By regulation, REITs are mandated to pay out dividends every year. So, it is an investment for people who want annual income, and such income is not usually affected by the volatility of the stock market in terms of distribution.
We should not also forget that the underlying real estate assets of the REITS are usually in choice highbrow locations with the best of tenants in the industry. That means that the risk associated with the properties is very low.
It has returns that are stable and predictable. That is something that makes investors cherish it. The REIT is suitable for investors who want regular, stable and consistent income distribution.
It has been tough for everybody. How has UPDC been navigating the tough business environment, especially in the last 12 months?
UPDC has been very resilient; we had been able to weather the storm in many difficult economic cycles. We had to innovate and institute some very important reforms which have allowed us to be able to weather the storm. We have refocused our business and also diversified our income streams. We don’t just rely on our major source of income which is property development. We have gone into other areas which give us multiple streams of income. That is very key to our survival.
Secondly, we have also become more efficient in our processes by employing technology to reduce waste. We are not spending so much to deliver our products and services. Efficiency is key here. We have improved our processes so that projects are delivered quicker. Now, we have a faster turnaround.
We have also become market-sensitive. The market is very dynamic and we deliver to the market what it wants. Before we deliver any project, we try to ensure that it already has identified off-takers and we also try to ensure we are not exposed to too many external risks. The journey continues, but so far, so good.
